Channeling Graham and Dodd: A Conversation with Seth Klarman

Early in the process of defining how to update Graham and Dodd’s Security Analysis, the acknowledged “bible of value investing,” lead editor Seth Klarman and his assembled team abandoned any notion of editing the text of 1940’s second edition. “It would have taken a decade to rewrite, with absolutely no assurance we could have improved upon it anyway,” he says.

Instead, Klarman assembled a who’s who of prominent value investors – including Glenn Greenberg, David Abrams, Howard Marks and Thomas Russo – to write introductory commentary to each of the book’s sections, drawing out the timeless wisdom in the original text and combining it with additional insight and examples relevant to today’s market.

In the September 30 edition of Value Investor Insight, Klarman described this process. Key excerpts follow:

Why take on what was surely a time-consuming role with this book?

Seth Klarman: First of all, it was an honor to be asked and I don’t think one says “no” lightly to something like that. But on top of that, I feel a huge amount of loyalty to Graham and Dodd. Their thinking has influenced mine right from the beginning, so what could be more of an honor – and more of a responsibility – than to contribute to updating their work?

What tenets of Graham and Dodd have most influenced you as an investor?

SK: I think Graham and Dodd’s writing is not actually about investing, but about thinking about investing. Any book can say, “Buy stocks that fit the following criteria,” but Graham and Dodd go beyond that to fully explain why. It’s like the difference between being able to divide two numbers using a calculator and actually knowing long division. A Graham and Dodd investor understands both the numbers and the concepts behind the numbers. In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there’s also something validating about the message that it’s okay to do nothing and wait for opportunities to present themselves or to pay off. That’s lonely and contrary a lot of the time, but reminding yourself that that’s what it takes is quite helpful.

Warren Buffett is right when he says you should invest as if the market is going to be closed for the next five years. That’s particularly relevant right now – who knows, that might be the next thing the government does! The fundamental principles of value investing, if they make sense to you, can allow you to survive and prosper when everyone else is rudderless. We have a proven map with which to navigate. It sounds kind of crazy, but in times of turmoil in the market, I’ve felt a sort of serenity in knowing that if I’ve checked and re-checked my work, one plus one still equals two regardless of where a stock trades right after I buy it.

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